Graco 2007 Annual Report Download - page 49

Newell Rubbermaid Inc. 2007 Annual Report
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Shipping and Handling Costs
The Company records shipping and handling costs as a component of costs of products sold.
Product Liability Reserves
The Company has a self-insurance program for product liability that includes reserves for self-retained losses and certain excess and aggregate risk
transfer insurance. The Company uses historical loss experience combined with actuarial evaluation methods, review of significant individual files and
the application of risk transfer programs in determining required product liability reserves. The Company’s actuarial evaluation methods take into account
claims incurred but not reported when determining the Company’s product liability reserve. While the Company believes that it has adequately reserved
for these claims, the ultimate outcome of these matters may exceed the amounts recorded by the Company, and such additional losses may be material
to the Company’s Consolidated Financial Statements.
Product Warranties
In the normal course of business, the Company offers warranties for a variety of its products. The specific terms and conditions of the warranties vary
depending upon the specific product and markets in which the products were sold. The Company accrues for the estimated cost of product warranty at
the time of sale based on historical experience.
Advertising Costs
The Company expenses advertising costs as incurred. Cooperative advertising with customers is recorded in the Consolidated Financial Statements as a
reduction of net sales and totaled $149.5 million, $153.3 million and $147.4 million for 2007, 2006 and 2005, respectively. All other advertising costs are
recorded in selling, general and administrative expenses and totaled $216.5 million, $199.9 million and $135.6 million in 2007, 2006 and 2005, respectively.
Research and Development Costs
Research and development costs relating to both future and current products are charged to selling, general and administrative expenses as incurred.
These costs aggregated $111.2 million, $102.0 million and $92.5 million in 2007, 2006 and 2005, respectively.
Derivative Financial Instruments
The Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Derivative financial instruments are
generally used to manage certain commodity, interest rate and foreign currency risks. These instruments include commodity swaps, interest rate swaps,
long-term cross currency interest rate swaps, forward exchange contracts and options. The Company’s forward exchange contracts, options and long-term
cross currency interest rate swaps do not subject the Company to risk due to foreign exchange rate movement because gains and losses on these
instruments generally offset gains and losses on the assets, liabilities, and other transactions being hedged.
On the date in which the Company enters into a derivative, the derivative is designated as a hedge of the identified exposure. The Company measures
effectiveness of its hedging relationships both at hedge inception and on an ongoing basis. No ineffectiveness was recorded on designated hedges in 2007,
2006 or 2005.
Interest Rate Risk Management
Gains and losses on interest rate swaps designated as cash flow hedges, to the extent that the hedge relationship has been effective, are deferred in other
comprehensive income and recognized in interest expense over the period in which the Company recognizes interest expense on the related debt instrument.
Any ineffectiveness on these instruments is immediately recognized in interest expense in the period that the ineffectiveness occurs.
The Company also has designated certain interest rate swaps as fair value hedges, which have been structured to be 100% effective. These hedging
instruments include interest rate swaps, long-term cross currency interest rate swaps and forward exchange contracts. See foreign currency management
below for discussion of cross currency interest rate swaps and forward exchange contracts Gains or losses resulting from the early termination of interest
rate swaps are deferred as an increase or decrease to the carrying value of the related debt and amortized as an adjustment to the yield of the related debt
instrument over the remaining period originally covered by the swap. The cash received or paid relating to the termination of interest rate swaps is included
in Other as an operating activity in the Consolidated Statements of Cash Flows.